Reason for Hope? - Novartis Rescinds Vasella's Golden Parachute

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effect on patients' or the public's health, has long been a <a href="http://hcrenewal.blogspot.com/search/label/executive%20compensation">concern</a> on <a href="http://hcrenewal.blogspot.com/">Health Care Renewal</a>.  For example, back in 2006, we posted repeatedly (look <a href="http://hcrenewal.blogspot.com/2006/10/another-really-big-one-bites-dust-ceo.html">here</a> for links) about the billion dollar plus fortune amassed by the then CEO of UnitedHealthcare which vividly contrasted with the company's avowal to "make health care more affordable."<br /><br />We have posted many such stories.  Yet maybe there is a whiff of change in the air.  For the first time that I can recall, a gigantic pay package to a top health care executives has been rescinded after public protest.<br /><br /><b>Novartis' Golden Parachute for Vasella </b><br /><br />This is how the New York Times <a href="http://www.nytimes.com/2013/02/19/business/global/for-daniel-vasella-of-novartis-78-million-to-keep-secrets.html">described</a> the huge golden parachute that was initially proposed: <br /><br /><blockquote class="tr_bq"><i>A plan by Novartis<a class="meta-org" href="http://topics.nytimes.com/top/news/business/companies/novartis_ag/index.html?inline=nyt-org" title="More information about Novartis A.G"></a>, one of Switzerland’s biggest drug makers, to pay its departing chairman $78 million to keep him from sharing his knowledge with competitors</i> has added fuel to an already heated debate about executive pay.<br /><br /><div itemprop="articleBody">The announcement of the payment to the chairman, Daniel Vasella, was made last Friday, just two weeks before a Swiss referendum to give shareholders more power to determine executive compensation. Mr. Vasella, who had previously said that he would step down as chairman at Novartis’s annual shareholder meeting on Friday, <i>is to receive the sum, <b>72 million Swiss francs</b>, over six years. </i></div><div itemprop="articleBody"><br /></div>In a statement, Mr. Vasella said that 'it has been very important to Novartis that I refrain from making my knowledge and know-how available to competitors and to take advantage of my experience with the company.'</blockquote><br /><b>Unprecedented Resistance by Shareholders, Politicians and the Public </b><br /><br />The plan to provide this "golden parachute" met stunning resistance from Swiss citizens and company shareholders.  As the Times reported,<br /><br /><blockquote class="tr_bq"><div itemprop="articleBody">Swiss lawmakers and shareholder activists criticized the company over the weekend for not making the amount public earlier. They also contended that the planned payment was just the latest of several bad decisions by Novartis on executive pay. </div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Ethos, a Swiss group of investors, on Monday <i>called on Novartis to immediately cancel the contract with Mr. Vasella and take back any money already paid</i>. </div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Christophe Darbellay, president of the Christian Democratic People’s Party, told a Swiss newspaper, SonntagsZeitung, that <i>Mr. Vasella’s compensation was 'beyond evil.'</i> Simonetta Sommaruga, the Swiss federal justice minister, told another newspaper, SonntagsBlick, that <i>the payment was an 'enormous blow for the social cohesion of our country'</i> and that such 'help-yourself mentality' was damaging confidence in the economy. </div></blockquote><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Even Swiss identified as pro-business or right-wing joined in the criticism.  As <a href="http://www.swissinfo.ch/eng/swiss_news/Vasella_s_extra_pay_stirs_up_emotions.html?cid=35006618">reported</a> by the Swiss Broadcasting Company, </div><div itemprop="articleBody"><br /></div><blockquote class="tr_bq"><div itemprop="articleBody">Philipp Müller, president of the centre-right Radical Party which traditionally has close links with the business community, is quoted as saying <i>Vasella was 'taking liberal Switzerland to the henchman'.</i><br /><br />Other politicians described the latest figure as <i>'disgusting' and denounced the recklessness of top managers.</i><br /><br />The director of the Swiss Business Federation, which has been leading the fight against the initiative, said he was surprised by the 'dimension of the payment' to Vasella.</div></blockquote><div itemprop="articleBody"><br /></div><div itemprop="articleBody"><b>A Golden Parachute Despite a Past Record of Misadventures </b></div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Maybe there would have been even more outrage if those in Switzerland had known about Novartis' track record of misadventures, at least in the US, while Vasella had been leading it.  In particular,</div><div itemprop="articleBody">-  In 2011, as we noted <a href="http://hcrenewal.blogspot.com/2011/12/legal-settlements-have-become-so-common.html">here</a>, a company subsidiary paid $150 million to settle charges by several US states that it had misrepresented pricing information</div><div itemprop="articleBody">-  In 2010, as we noted <a href="http://hcrenewal.blogspot.com/2010/10/novartis-settles-but-wait-theres-more.html">here</a>, the company settled US federal civil and criminal charges in connection with its marketing of multiple drugs for $422.5 million.  The charges included giving kickbacks to physicians disguised as speakers' honorariums and fees for serving on advisory boards.  </div><div itemprop="articleBody">-  In 2010, as we noted <a href="http://hcrenewal.blogspot.com/2010/05/novartis-settles-again.html">here</a>, the company settled separate US charges that it made false claims to support off-label marketing of its drug tobramycin for cystic fibrosis for $72.5 million.  </div><div itemprop="articleBody">- In 2008, as we noted <a href="http://hcrenewal.blogspot.com/2008/07/bad-week-in-court-for-us-health-care.html">here</a>, the company settled charges in the US state of Alabama that it defrauded Medicaid for $33.7 million.<br /><br />However, these legal escapades were not mentioned in the recent media coverage of the proffered and then withdrawn parachute.  </div><div itemprop="articleBody"><br /></div><div itemprop="articleBody"><br /></div><div itemprop="articleBody"><b>The Company Backs Down. </b></div><div itemprop="articleBody"><br /></div><div itemprop="articleBody">Nonetheless, what was really surprising was that the outrage made the company back down.  <a href="http://online.wsj.com/article/SB10001424127887323495104578313670408396876.html">Per</a> the Wall Street Journal, </div><div itemprop="articleBody"><br /></div><blockquote class="tr_bq"><div itemprop="articleBody">Novartis AG on Tuesday <i>abandoned a 72-million-Swiss-franc ($78 million) exit package for its chairman, bowing to pressure from shareholders and Swiss politicians after four days of increasing criticism.</i></div><div itemprop="articleBody"><br /></div>The Swiss drug maker said its board and Chairman Daniel Vasella<a class="topicLink" href="http://topics.wsj.com/person/V/Daniel-Vasella/4329"></a> agreed to cancel a six-year noncompete and related-compensation agreement designed to prevent him from joining or advising rivals and which would have paid him 12 million francs a year.<br /><br />The agreement was scheduled to take effect on Friday, when Dr. Vasella, 59 years old, is planning to leave the Basel-based company at its annual shareholder meeting</blockquote><br />Furthermore,<br /><br /><blockquote class="tr_bq">In the Novartis statement on Tuesday, Dr. Vasella acknowledged that his offer hadn't soothed public opinion: <i>'I have understood that many people in Switzerland find the amount of the compensation linked to the noncompete agreement unreasonably high,'</i> he said. </blockquote><br />In addition, as Reuters noted, Vasella actually admitted he made "mistakes,"<br /><br /><blockquote class="tr_bq"><span id="articleText">'The fierce reaction and reproaches that were made as a consequence of the many-sided discussions about my compensation did leave its mark on me,' 59-year-old Vasella said in his opening address to 2,688 shareholders gathered at Novartis's annual general meeting in Basel.<br /><br /><span id="midArticle_3"></span>'<i>I made two avoidable mistakes: the first was to even negotiate this contract.</i> And the second to believe that giving up this individual payment to charities would be considered as something positive by society.'</span></blockquote><span id="articleText"></span><br /><br />Of course, it is hard to believe that Novartis had previously paid him as lavishly as it did  - the New York Times had reported that his pay just prior to resignation was 12.4 million francs, "about $13.4 million a year" -  without securing an agreement to protect trade secrets.  Many businesses routinely add confidentiality clauses, trade secret protection, and non-compete clauses to contracts of many employees.  Thus adding a $78 million golden parachute ostensibly just to protect trade secrets and defection to the competition seems like impossibly gilding the lily.  Furthermore, if Novartis really thought that Vasella was likely to run to another firm at the drop of a hat, it would have made no sense to entrust someone thought to be at risk of such disloyalty with top leadership positions. <br /><br /><b>Reason for Hope </b><br /><br />At least Chairman Vasella admitted "mistakes," and at least the ridiculous pay package was rescinded. This incident does show that it is possible for public and shareholder outrage over gargantuan payments to executives to have some effect.  That seems like real progress, and a reason to hope.  <br /><br />Of course, executives of public for-profit corporations are supposed to be working for shareholders.  Thus their general impunity from shareholders' control up to now remains inexplicable.  Furthermore, executives of pharmaceutical companies and other health care corporations seemingly should be responsible for putting patients' and the public's health ahead of their own enrichment.  Thus their ability up to now to ignore public concern about their companies' actions, and to avoid personal responsibility for their companies' bad actions also remains inexplicable. <br /><br />But progress may now be possible.  In and outside of Switzerland, shareholders of publicly-held for-profit health care corporations should demand accountability from the executives who are supposed to be working for them.  In and outside of Switzerland, health care professionals, policymakers, and the public at large should demand accountability from leaders of health care organizations for the effects of their organizations on patients' and the public's health.  <br /><br /><br />

Reason for Hope? - Novartis Rescinds Vasella's Golden Parachute

Enormous compensation of hired health care executives, out of all proportion, if related at all to whether their work had any positive effec...

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Green Ketchup for Novartis?

We recently <a href="http://hcrenewal.blogspot.com/2010/01/drowning-our-sorrows-in-ketchup.html">commented</a> on the challenges facing the large, Swiss based multinational pharmaceutical company Novartis.  <a href="http://www.businessweek.com/magazine/content/10_07/b4166058305717.htm">From Business Week</a> came an interview with the new CEO of Novartis, in which he revealed why he thinks he is especially qualified for the job:<br /><blockquote>Joe Jimenez says that <em>more than 20 years selling Clorox (CLX) bleach and Heinz ketchup taught him to make decisions quickly</em>. Now, as CEO of Novartis (NVS), Europe's second-largest drugmaker, he'll try to prove that speed can also make a difference in the pharmaceutical business. <br /><br />Jimenez, an American with degrees from Stanford and the University of California at Berkeley, <em>believes his consumer-products background will help</em>. <em>He started his career at Clorox, the world's largest maker of bleach, ran two divisions of ConAgra Foods (CAG), and oversaw H.J. Heinz' (HNZ) European operations. </em>With consumer packaged goods, 'Decisions have to be made quickly because the market moves quickly,' he says. But pharmaceutical businesses have long development lead times, which 'tends to slow decision-making in areas where it doesn't need to.'<br /><br /><em><strong>Jimenez oversaw the introduction of kid-friendly green ketchup when he was Heinz' North America chief executive</strong></em>,....</blockquote>Further explanation of why supervising the selling of cleaning or food products would be good experience for the chief executive of a pharmaceutical company, which faces technical, regulatory, and clinical issues very different from the challenges of selling bleach or ketchup, was not forthcoming.<br /><br />The reason for citing Jiminez's responsibility for green ketchup was more obscure.  According to the authoritative medical journal, <a href="http://www.womansday.com/Articles/Food/The-Biggest-Food-Product-Duds-of-All-Time.html">Woman's Day magazine</a>, Heinz's green ketchup was one of the <em><strong>"7 Biggest Food Product Duds," in the US, and was discontinued in 2006.</strong></em><br /><br />As we have <a href="http://hcrenewal.blogspot.com/2009/12/on-automobile-and-health-care-companies.html">discussed before</a>, the current culture of US and global business includes the belief that someone trained in finance or marketing is the most suitable leader of every type of organization.  Such leadership has lead the US biggest automobile manufacturer into bankruptcy.  We have discussed numerous examples of leaders of health care organizations with no health background or experience who seem to be most expert at making sure their compensation is hugely larger than that of most of their employees.<br /><br />We hope Novartis does not end up trying to sell the pharmaceutical equivalent of green ketchup.  <br /><br />I say again, to really reform health care, we need to have leaders of health care organizations who actually understand health care and share its values.

Green Ketchup for Novartis?

We recently commented on the challenges facing the large, Swiss based multinational pharmaceutical company Novartis.  From Business Week c...

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Drowning our Sorrows in Ketchup: Novartis Settles, Appoints Former Heinz Executive CEO

Here's the latest corporate health care marcher in the legal settlement parade, as <a href="http://online.wsj.com/article/SB10001424052748703906204575026963160833710.html">reported in the Wall Street Journal</a>.<br /><blockquote>Swiss drug giant Novartis AG said its U.S. subsidiary <em>struck a plea agreement with U.S. investigators to resolve criminal allegations regarding the company's promotion of the epilepsy drug Trileptal, and agreed to pay a $185 million fine.</em><br /><br />Federal investigators have been carrying out civil and criminal investigations of Novartis' marketing of the drug, including <em>allegations that it promoted the drug for uses for which it is not approved by the Food and Drug Administration, an illegal practice known as 'off-label' marketing,</em> Novartis said in a statement Tuesday as it announced fourth-quarter results. <br /><br />To resolve criminal allegations, <em>Novartis said it agreed to plead guilty to a violation of the U.S. Food, Drug and Cosmetic Act,</em> and to pay a fine of $185 million.</blockquote><br />It has become a drearily familiar ritual. We have now <a href="http://hcrenewal.blogspot.com/search/label/legal%20settlements">discussed</a> numerous instances of large health care corporations pleading guilty to criminal charges and/or settling civil allegations of unethical behavior.  In the current case, like nearly all the others, the corporation will pay what seems to be a huge fine.  However, the amount is a pittance compared to the corporation's revenue, and is likely to be viewed as only a small cost of doing a very lucrative business by corporate executives.  In very few cases does any individual suffer any negative consequence for approving, ordering or implementing the unethical behavior.  <br /><br />Thus, I would argue that these cases remind us how unethical the health care "business" has become, but the way they have been resolved will fail to deter future bad behavior.  A large fine's impact can be spread among share-holders, employees, and clients/ customers/ patients, and hence poses no threat to executives planning the next bit of unethical behavior.  <br /><br />In fact, the most notable aspect of the current case is that the corporation involved in not run out of the US, but rather out of Switzerland, showing that this pattern is not exclusively an American one.<br /><br />There is an interesting juxtaposition to this case, however.  At the same time this settlement was announced, Novartis <a href="http://blogs.wsj.com/health/2010/01/26/new-novartis-ceo-cafepharma-reader-former-heinz-exec/">disclosed</a> its new CEO.  A Wall Street Journal <a href="http://online.wsj.com/article/SB10001424052748703906204575027083891374688.html">commentary</a> opined, that the " New Novartis Chief Needs Surgery Skills."  Ironically, the new CEO is hardly a surgeon.  <a href="http://www.novartis.com/downloads/newsroom/corporate-press-kit/7j_CV_Joe_Jimenez_EN.pdf">Here</a> is a summary of his background.<br /><blockquote>Mr. Jimenez began his career in the United States at The Clorox Company, and later served as president of two operating divisions at ConAgra. <em>In 1998, he joined the H.J. Heinz Company, and was named President and Chief Executive Officer of the North America business. From 2002 to 2006, he served as President and Chief Executive Officer of Heinz in Europe.</em><br /><br />Before joining Novartis, he was a NonExecutive Director of Astra-Zeneca plc, United Kingdom, from 2002 to 2007; and was an advisor for the private equity organization Blackstone Group, United States. Mr. Jimenez joined Novartis in April 2007 as Head of the Consumer Health Division and was appointed to his present position in October 2007.<br /><br />Mr. Jimenez graduated with a bachelor’s degree from Stanford University in 1982 and with an M.B.A. from the University of California, Berkeley, in 1984.</blockquote><br />I would guess that all that expertise marketing ketchup will come in handly preventing the need for more settlements of illegal marketing practices.  Seriously, we have <a href="http://hcrenewal.blogspot.com/2009/12/on-automobile-and-health-care-companies.html">discussed</a> the logic and evidence behind the assertion that health care corporations ought to be run by people with relevant experience and values.  We wish Mr Jimenez well, but hope that he realizes that if he is to prevent future events that could throw his company into disrepute, he ought to lean heavily on people who understand medicine and biomedical science, and who support physicians' core values.<br /><br />More broadly, I again suggest that real US health care reform would need to deal with both these issues.  We need to have rigorous regulation of health care organizations that has the power to deter unethical behavior that may risk patients' health.  We need to have leaders of health care organizations who actually understand health care and share its values.  <br /><br />Two hat tips to the PharmaGossip blog (<a href="http://pharmagossip.blogspot.com/2010/01/meet-joe-jimenez-new-ceo-at-novartis.html">here</a> and <a href="http://pharmagossip.blogspot.com/2010/01/novartis-says-us-unit-to-pay-fine.html">here</a>).

Drowning our Sorrows in Ketchup: Novartis Settles, Appoints Former Heinz Executive CEO

Here's the latest corporate health care marcher in the legal settlement parade, as reported in the Wall Street Journal . Swiss drug gian...

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